Nov. 29 (Bloomberg) -- India’s inflation is producing an
unexpected beneficiary. Motorcycle makers are poised for record
sales this year as the highest borrowing costs among Asia’s
major economies push consumers to choose a cheaper ride.

Two-wheeler deliveries rose 2 percent in October, extending
consecutive monthly gains since January 2009, while passenger-vehicle sales tumbled the most in more than a decade, as the
central bank implemented the fastest round of interest rate
increases in its history.

“The worst affected is the passenger-car market, where the
dependence on loans and the ticket price is high,” said Ravi
Sud, chief financial officer of Hero MotoCorp. Ltd., maker of
almost half the motorcycles in India. “Only about 30 percent of
buyers buy a motorcycle with a loan.”

Motorcycle manufacturers are gaining at the expense of Tata
Motors Ltd., maker of the world’s cheapest car, Maruti Suzuki
India Ltd. and Ford Motor Co., as consumers put off auto
purchases, forcing the industry group to cut its growth forecast
for a second time this year. About 80 percent of cars are bought
with loans, according to market researcher IHS Automotive.

“People want to feel good when they buy a car,” said
Deepesh Rathore, the managing director of IHS Automotive in
India. “Right now, they are worried about the economy.”

Motorcycles have traditionally outsold passenger cars in
India. Last year, the ratio was about 6 to 1. Tata wanted to
persuade motorcyclists to upgrade to the Nano, but that has
become increasingly difficult as interest rates have risen.

Hero’s best-selling 100-cc Splendor motorcycle starts at
42,350 rupees ($830) in New Delhi, compared with Tata’s Nano at
140,880 rupees, according to the companies’ websites. Maruti’s
lowest-priced model, the 800 minicar, sells for about 197,000
rupees.

‘More Sense’

“More people are opting for two-wheeler licenses,” said
Pratap Tavadkar of Shiv Krupa Motor Driving School in Mumbai’s
suburb of Borivali. “Petrol prices keep rising and car prices
are also going up and so, especially for short distances, bikes
make more sense.”

India has the highest borrowing costs in Asia after
Pakistan and Vietnam. The Reserve Bank of India has raised the
central bank’s repurchase rate by 375 basis points since mid-March 2010 to 8.5 percent to tame inflation. That’s the fastest
pace of increases since its establishment in 1935, Bloomberg
data show.

Gasoline costs were at a record 68.64 rupees a liter in New
Delhi before Indian Oil Corp., the nation’s biggest refiner, cut
pump prices by 3.2 percent on Nov. 15 following protests by the
opposition and some members of the ruling coalition. Prices
remain 26 percent higher than a year ago after the reduction,
according to figures from the refiner’s website.

Rural Growth

Maruti’s shares have declined 32 percent this year in Mumbai
trading while Tata Motors is down 31 percent, underperforming the
benchmark Sensitive Index, which has fallen 21 percent. Hero has
gained 2.3 percent while rival motorcycle manufacturer Bajaj Auto
Ltd. is up 5 percent.

Hero forecasts net sales to rise 27 percent this fiscal
year, driven by growth in rural areas. The New Delhi-based
company will boost the production capacity of its existing
factories to 7 million units by March from 5.4 million last
year, and build a fourth factory by 2013, according to Sud.

Honda Motorcycle & Scooter India Pvt., a unit of Tokyo-based Honda Motor Co., plans to expand its dealer and service
outlets by 25 percent to sell 2.1 million two-wheelers this
fiscal year, Naresh Kumar Rattan, vice president for sales, said
in an interview. The company sold 1.5 million units a year ago.

Industry Sales

Total sales of motorcycles and scooters rose to 1.15
million units last month, according to the Society of Indian
Automobile Manufacturers, or SIAM. Passenger-vehicle sales fell
for a fourth month in October, dropping 24 percent to 138,521
vehicles, according to the association. That’s the steepest
monthly decline since December 2000, according to SIAM.

Manufacturers sold 11.8 million two-wheelers last fiscal
year, the most ever, compared with 1.98 million passenger cars.

“For recovery to happen, interest rates have to go down,”
Vishnu Mathur, director general of the industry body, said of
car sales on Nov. 9 in New Delhi. “Also, fuel prices need to
cool.”

The auto group, which cut its estimate for car sales last
month, is forecasting growth of as low as 2 percent for the year
ending March 31. In April, it projected an 18 percent rise and
lowered that to 12 percent in July.

Nano, Alto

Demand for the Nano, the $2,800 minicar that Chairman Ratan
Tata developed to entice first-time buyers, has dropped since it
was first introduced in 2009. Local deliveries plunged 67
percent in the quarter ended Sept. 30 to 7,398 units,
contributing to a 15 percent slump in second-quarter profit at
Tata to 18.8 billion rupees, according to the Mumbai-based
company.

Ford’s Indian unit had an 8.4 percent drop in April-to-October sales to 52,166 units, led by a decline in deliveries of
its entry-level Figo hatchback, according to association data.

Maruti, which sells almost half the cars sold in India,
said fiscal-year sales slumped 17 percent through October, as
demand for its Alto, the nation’s best-selling model, waned and
a series of strikes increased the waiting time for its Swift
hatchback.

“The percentage of first-time buyers isn’t really
increasing as well as we would like it to,” said Mayank Pareek,
head of sales and marketing for New Delhi-based Maruti, which is
54 percent owned by Japan’s Suzuki Motor Corp. “Everybody needs
mobility and since they can’t afford better mobility, they stick
with the basics which they can afford.”